Monex: Fed leaves policy unchanged despite rising inflation
Monex: Fed leaves policy unchanged despite rising inflation
This is a preview by Ima Sammani, FX Market Analyst at Monex Europe, to next Wednesday's FOMC policy meeting.
Since the last FOMC meeting, numerous overshoots in inflation data and signs of supply constraints in the labour market were paired with Federal Reserve policy makers shifting their tone to take on a slightly more hawkish stance. While some members have called for the Fed to begin discussing QE tapering at upcoming meetings, US policymakers seem unconcerned by rising inflation data on the whole.
Although the Fed has been clear that it will look through any transitory overshoots, June and July will likely continue to see elevated data as during this period last year lockdown measures over many states were tightened while this summer the economy continues to reopen. As inflation rises amid positive signs in economic activity, markets have wondered whether a favourable macro reassessment by the Fed will lead to a change in the forward guidance.
Asset purchases, the Fed’s marginal policy tool at present, is in focus while interest rate expectations remain well anchored. Over the past months, tapering discussions have become increasingly relevant for markets in the view of evaluating the sensibility of the Fed’s reaction function to incoming inflation data and pricing in a potential lift-off of back-end yields.
However, a wide array of commentary from both sides of the Fed spectrum suggests that tapering discussions are just starting to appear. With a firm dual mandate on inflation and employment goals, the US economy is still far off the further progress needed to consider an effective withdrawal of stimulus.
Consensus is growing around the idea that the Fed will start conducting smaller purchases from the beginning of next year, when the US economy is in a healthier position. Despite expectations of actual tapering in 2022, the announcement of such a timeline is expected around August, when the Fed might star in the Jackson Hole conference with the news.
As the Fed ́s policy path is outcome-based, relying on this agenda is merely indicative. A few more positive prints in labour market data will be necessary to that end.